On October 9 – 11, 2015, the first meeting of the Uniform Law Commission (ULC) Drafting Committee on Regulation of Virtual Currencies (the Committee) was held in Washington, D.C. The ULC (also known as the National Conference of Commissioners on Uniform State Laws) is a non-partisan organization of practicing lawyers, academics, judges, legislators and legislative personnel that works to research, draft and promote the enactment of uniform state laws in areas where such uniformity would bring public benefits. In light of the rapid development of the virtual currency marketplace and interest in a common set of standards that would bring more certainty to regulation of participants in that marketplace, the ULC tasked the Committee with developing a draft uniform law on the regulation of virtual currencies by the next annual meeting of the ULC in July 2016. Interested parties are encouraged to participate in the ULC’s process, which will be influential in setting the standards for state regulation of virtual currency businesses.1
Status of the Committee’s Work
The Committee’s work is an outgrowth of an earlier Study Committee on Alternative and Mobile Payment Systems. That group recommended focusing on the pressing need for a common set of standards for regulating certain types of virtual currency companies, which lead to the formation of the Committee. Accordingly, at its recent initial meeting, the Committee discussed a very preliminary draft of a proposed model “Regulation of Virtual Currencies Act” (Draft Model Act) prepared by the Reporter, Sarah Jane Hughes, a professor at Indiana University who works extensively in payments law. The Draft Model Act borrows liberally from the New York “BitLicense” regulation2 as well as the draft licensing framework promulgated by the Conference of State Bank Supervisors (CSBS).3 Based on the discussions at the recent meeting and further follow-up to come, it is expected that a significantly revised version of the Draft Model Act will be circulated prior to year end.4
Content of the Draft Model Act
The initial version of the Draft Model Act is divided into twelve articles, as summarized below.
Article 1 (General Provisions): This Article includes definitions, a critical area for establishing the scope of the Draft Model Act. The initial draft defines “digital currency” as “any type of digital unit that is used as a medium of exchange and that operates like currency in some environments, but is not legal tender and does not have the attributes of real currency,” and expressly includes both centrally managed and decentralized systems and excludes several types of digital units, such as closed-loop gaming currencies, similar to the exclusions incorporated in the New York “BitLicense” regulation. Article 1 also includes a variety of exemptions, including exemptions for banks, broker-dealers and registered futures commission merchants. Similar to the Uniform Money Services Act, however, the bank exemption is limited to institutions that do not “issue, sell, or provide digital currency, payment instruments, or stored value through a person that is not a licensee under [this act],” a provision that would uniquely disadvantage state-chartered banks and therefore is likely to be deleted in the next round of drafting.
Article 2 (General Provisions): This Article contains general requirements for licensing, including application and renewal processes and the possibility of provisional licensing, as well as standards for bonding and capital. Importantly, the Draft Model Act raises the possibility of reciprocity standards that could significantly streamline the state licensing model if widely adopted and implemented by the states.
Articles 3-5 (Reserved): The Reporter included placeholders in the draft, recognizing that there may be a need to differentiate among different types of licensees as drafting continues.
Article 6 (Examination; Reports; Records): Article 6 covers the examination process, including provisions to address cooperation and data sharing among states in connection with examination of licensees. It also addresses issues of reporting and recordkeeping, including in the somewhat controversial area of state anti-money laundering requirements.
Article 7 (Permissible Investments): The Article on permissible investments provides substantial flexibility to individual state superintendents/commissioners, but expressly references the role of digital currency itself as a permissible investment. The draft does not yet provide guidance, however, on questions such as the role of permissible investments in circumstances where multi-signature technology means a licensee may have the ability only to block transfer of virtual currency, but may not have the ability to transfer it unilaterally.
Article 8 (Enforcement): This Article, currently, is largely a placeholder for standard enforcement authorities of licensing agencies.
Article 9 (Administrative Procedures and Powers of the [Supervisory Agency or Senior Supervisory Officer]): This Article provides procedural administrative protections for licensees consistent with state administrative procedures acts.
Article 10 (Disclosures and User Protections; Cybersecurity Programs and Monitoring; Business Continuity and Disaster Recovery Programs): Article 10 combines a number of important requirements on a diverse set of topics. It covers user protection requirements, including a variety of disclosures and fraud prevention requirements, as well as mandates for cybersecurity, business continuity and disaster recovery.
Article 11 (Compliance): Article 11 covers basic compliance standards, such as development of a compliance policy and designation of a qualified compliance officer.
Article 12 (Miscellaneous): The final Article includes provisions for transitioning to the new licensing scheme.
As indicated above, it is likely that the Draft Model Act will continue to draw heavily on the work done on the New York BitLicense and the CSBS Model Virtual Currency Framework. Nonetheless, drafting is at an early stage and interested parties have an opportunity to provide input on a wide range of topics that will be critical to the utility of the final model act as a regulatory framework for licensing of entities engaged in a variety of virtual currency activities. Many questions will undoubtedly receive further attention and discussion, such as who must be licensed, what protections (if any) will be provided as an “on ramp” for businesses operating at the time of enactment of the new requirements and for new start-ups, what types of user protections should be provided and what type of anti-money laundering and cybersecurity provisions are appropriate. Accordingly, individuals and companies interested in this area would be well-served to monitor and/or become involved in the activities of the Committee as it continues its work in the coming months.